3.1.A (3 points) Compute the current ratio for Netflix as of December 31, 2020, December 31, 2019,December 31, 2018. Do NOT include “Deferred revenue” in the computation of this ratio. Round to 2decimal places.Answers: December 31, 2020 _______; December 31, 2019 _______; December 31, 2018 _______3.1.B (3 points) During the three years covering fiscal years 2018, 2019, and 2020, Netflix’s currentratio dipped to a level that signaled an impending liquidity crisis. If Netflix had not responded to theimpending crisis and had maintained the same cash balance on December 31, 2020, that theyreported on December 31, 2019, what would have been the value of its current ratio on December 31,2020? Do NOT include “Deferred revenue” in the computation of this ratio. Round to 2 decimalplaces.Answer: __________Operating/Profitability Metrics3.2.A. (3 points) During the three years covering fiscal years 2018, 2019, and 2020, the amountsNetflix reported as “revenue” increased substantially. Netflix depends heavily on marketing to drivedemand. Compute the percentage of sales revenue spent on marketing expenses for the fiscal yearsended December 31, 2018, and December 31, 2020. What is the change in the percentage of salesrevenue spent on marketing expense from the year ended December 31, 2018, to the year endedDecember 31, 2020, and has the percentage increased or (decreased)? Round percentages to 1decimal places (e.g., xx.x%)Answers: _________% Indicate if the change is an _____ Increase or _____ Decrease3.2.B (3 points) Marketing appears to be a crucial part of Netflix’s operating strategy and coststructure. Compute the percentage of “Operating expenses” dedicated to marketing for the fiscalyears ending December 31, 2020, 2019, and 2018. The term “Operating expenses” includes allexpenses considered in the calculation of “Operating income” except “Cost of revenues.” Roundpercentages to 1 decimal place (e.g., xx.x%).Answers: December 31, 2020 _______ %; December 31, 2019 _______ %; December 31, 2018_______ %3.2.C (3 points) If Netflix did not consider marketing essential, we can assume they would cut back onmarketing and devote those funds to other purposes. Without a major commitment to marketing, itappears that Netflix cannot achieve its goal of protecting and increasing market share. Explain howthe relationship between marketing expense and total operating expenses creates a cost structurethat results in a barrier to entry that discourages or prevents existing and potential competitors fromattempting to compete with Netflix for market share.Answer:
3.2.D (3 points) The “inventory” that Netflix streams includes previously canceled series from othernetworks, licensed and co-produced content, and Netflix original content. Netflix uses the term“content,” which roughly corresponds to “inventory,” and the term “cost of revenue,” which roughlycorresponds to “cost of goods sold.” Content assets are intangible property rights. Our course hasconsidered the importance of managing costs and cost accounting. These topics are of crucialsignificance to Netflix now that they have decided to produce their own original content.The ratio of cost-of-revenue/revenue provides a metric to assess how well Netflix has managed itsgross profit percentage. An increase in rates charged to customers and/or a decrease in the cost ofrevenue will result in an increase in the gross profit ratio. Relatively small changes in these ratios canhave a substantial impact on financial performance. The change in the ratio of cost-of-revenue/revenue over the three-year period is indicative of proactive measures undertaken by Netflix.If the ratio of cost-of-revenue/revenue reported for the year ended December 31, 2018, had remainedconstant over the three-year period, how much in thousands of dollars would operating income for theyear ended December 31, 2020 have decreased? Note: To avoid rounding errors, use a spreadsheetfor all calculations.Answer: $_____________________3.2.E (3 points) With reference to the preceding calculation (part 3.2.D), is the dollar amount of theimprovement in net income that is attributable to an improvement in the ratio of cost-of-revenue/revenue material? In other words, is the amount of the impact of the improvement significantin comparison to the net income reported for the year ended December 31, 2020? Explain.Answer:3.2.F (3 points) Netflix makes content for streaming rather than making a tangible product, such asfurniture or widgets. When accounting for the cost of original content, Netflix will account for the directmaterials, direct labor, and overhead expended to create the content. Producing content requiresproduction assets, licenses, and an investment in technology. Explain how accounting choicesregarding methods of depreciation and amortizations can influence the determination of the amountsreported as “cost-of-revenue.”Answer:Capitalization Metrics3.3.A (3 points) Many individuals have chosen to purchase their homes rather than rent, and many ofthese owners depend upon mortgages as a source of long-term financing. During the housing crisisbeginning in 2008, homeowners who bought with minimal down payments and homeowners whoborrowed extensively against their home’s appreciation found themselves in a highly leveragedposition when the housing crisis struck. These decisions made by homeowners’ parallel decisionsmade by Netflix executives. As reported on December 31, 2020, December 31, 2019, and December31, 2018, what percentage of total assets is financed by long-term debt? Round percentages to 1decimal place.Answers: December 31, 2020 ______ %; December 31, 2019 ______ %; December 31, 2018______ %
3.3.B (3 points) As reported on December 31, 2020, December 31, 2019, and December 31, 2018what percentage of total assets is financed by contributed capital paid-in by stockholders? Roundpercentages to 1 decimal place.Answers: December 31, 2020 ______ %; December 31, 2019 ______ %; December 31, 2018______ %3.3.C (3 points) As reported on December 31, 2020, what percentage of total assets is financed bypast profits that were reinvested in the company? Note: Ignore the amount reported as “Accumulatedother comprehensive loss;” it is relatively small and immaterial. Round percentage to 1 decimal place.Answer: _______ %3.3.D (3 points) During the three-year period ended December 31, 2020, has Netflix depended uponleveraging debt as an essential part of its growth strategy? Explain.Answer:3.3.E (3 points) In October of 2018, Netflix announced its intent to sell $2 billion in bonds toinstitutional buyers through an offering of U.S. dollar and Euro-denominated bonds. The bonds arenot secured by fixed assets or any other collateral, and the proceeds will be used for operatingpurposes. At issuance, Moody’s assigned Netflix a long-term credit rating of Ba3, which is consideredspeculative, or 'junk.' Investors purchasing these bonds will receive relatively higher interestpayments to compensate them for the underlying risk. Netflix will incur higher debt carrying expensesbecause of the relatively high rate it must pay. On the other hand, Netflix stockholders have notreceived any dividends during the three years ended December 31, 2020. How do you explain thestockholders’ willingness to accept the Board of Directors' decision to withhold dividend payments tostockholders?